Over the past three years, Pfizer
Inc. was an earner without profit in its own country.

The maker of the cholesterol medication Lipitor, the
world’s top-selling prescription drug, reported almost half its
revenues in the U.S. for 2007 through 2009, while booking
domestic pretax losses totaling $5.2 billion.

Abroad, it was another story. A Dutch subsidiary more than
made up for New York-based Pfizer’s American losses. It reported
pretax profits totaling $20.4 billion in 2007 and 2008 -- with a
tax expense of 5 percent, a seventh of the top U.S. rate.
Overseas tax savings increased the drugmaker’s net income by $1
billion last year, according to Robert Willens, a tax consultant
in New York.

Pfizer is one of thousands of American companies that
bolster their profits by attributing income to subsidiaries in
countries with lower income tax rates, legally cutting their tax
bills. Eli Lilly & Co. and Oracle Corp. were among other big
companies that helped drive a 70 percent increase in accumulated
earnings abroad that weren’t taxed in the U.S. from 2006 to
2009, according to data compiled by Bloomberg.

“An inordinate concentration of profits in a low-tax
country, way out of proportion to actual economic activity, is a
sure sign of aggressive tax planning,” said Martin Sullivan, a
tax economist who formerly worked for the U.S. Treasury and
Arthur Andersen LLP.

Earnings Increased

Willens, the president of Robert Willens LLC, a consulting
firm in New York that advises investors on tax issues, analyzed
financial filings for last year by Pfizer, Lilly and Oracle and
found:

-- Pfizer increased net income by 13 percent compared with
what it would have been without the tax benefit from foreign
earnings. The company’s $8.6 billion in net income would have
been $7.6 billion, Willens said.

-- Oracle reported $5.6 billion in net income last year, 14
percent more than it would have reported without foreign
earnings taxed at lower rates, according to the analysis.

To be sure, each of those companies has actual sales
abroad, although often in countries with tax rates similar to
the U.S., which has an average combined state and federal
corporate income tax rate of about 39 percent. Oracle, which
reported 44 percent of its sales in the U.S., had 16 percent in
Germany, Japan, Canada and France, countries with rates ranging
from 30 percent to 39 percent last year.

Intellectual Property

Dozens of U.S. companies attributed income to foreign
subsidiaries in 2008 that exceeded their share of actual sales
abroad, according to offshore corporate records and U.S.
securities filings compiled by Standard & Poor’s Capital IQ. In
some cases, the foreign units employ few or no workers.

For pharmaceutical and technology companies it’s relatively
easy to shift ownership of patents and other intellectual
property abroad, said Sheldon S. Cohen, a former IRS
commissioner who is now a director at the investment firm Farr,
Miller & Washington LLC in Washington.

In a typical arrangement, a company will license the
overseas rights for a patent developed in the U.S. to a
subsidiary in a low-tax country, said Michael C. Durst, special
counsel at Steptoe & Johnson LLP, in Washington. That permits
income from foreign sales to be attributed to the low-tax
country.

Treasury Department regulations require that prices paid
between subsidiaries, such as licensing fees, be based on what
unaffiliated companies would pay. Payments among Pfizer’s
subsidiaries are supported by economic studies of similar third-
party transactions, said Joan Campion, a company spokeswoman.

Arm’s Length

“All our transactions satisfy all arm’s-length
requirements,” Campion said. Charges related to cost-cutting
and mergers helped lower Pfizer’s U.S. income, she said. The
company manufactures Lipitor in Ireland, among other countries.

An Irish subsidiary of Oracle that has no employees and
paid no income tax in 2006 and 2007 was responsible for roughly
a quarter of the parent’s pretax income of $10.8 billion in
those years, according to Irish records and Oracle’s U.S.
securities filings. The unit distributes products “primarily in
the European market” that were developed by the Redwood City,
California-based company and “jointly funded under a cost
sharing arrangement,” according to its annual report from 2007,
the most recent year available.

Following the Laws

Ken Glueck, a senior vice president for Oracle, declined to
answer questions about the company’s use of transfer pricing. In
an e-mail, he compared transfer pricing to the mortgage-interest
deduction that individuals can claim.

“Can someone please explain to me how following the tax
laws of the United States became a reportable issue for
Bloomberg News?” Glueck wrote.

In each of the past seven years, Lilly has reported more
than half its sales in the U.S. yet more than half its profits
overseas. In 2007, a Swiss subsidiary booked pretax income of
$3.2 billion -- more than 80 percent of the $3.9 billion the
parent company reported that year.

The Swiss holding company has an Irish manufacturing branch
that produces drugs and sells them to affiliated companies,
according to its annual report.

“Lilly takes great care to ensure that we have properly
determined our income and assessed our tax obligations to each
jurisdiction in which we do business,” said Mark E. Taylor, a
company spokesman, in an e-mail. In some years, U.S. profits
were reduced by merger-related costs, he said.